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Senate Inquiry into Franchising

The proposed Terms of Reference for a Senate Inquiry into franchising have been settled, and flag a wide-ranging consideration of franchise regulation, regulator conduct and the functioning of the franchise sector. The Inquiry will specifically consider the effectiveness of the Franchising Code of Conduct (Franchising Code) and Oilcode of Conduct (Oilcode), as well as the impact of the new prohibitions on unfair contract terms in the Australian Consumer Law. The Inquiry flags consideration of “any related matter”, with accompanying material and informed media reporting indicating an intention to interrogate specific brands and no doubt seek specific examples from aggrieved franchisees.

The Parliamentary Joint Committee on Corporations and Financial Services will be asked to report by 30 September 2018 on:

The operation and effectiveness of the Franchising Code (including the disclosure document and information statement) and the Oilcode in ensuring full disclosure to potential franchisees of all information necessary to make a fully informed decision when assessing whether to enter a franchise agreement, including information on:

likely financial performance of a franchise and worse-case scenarios;

contractual rights and obligations of all parties (including termination rights and geographical exclusivity;

leasing arrangements and any limitations of the franchisee’s ability to enforce tenant’s rights; and

expected running costs including costs of goods required to be purchased through prescribed suppliers.

Effectiveness of dispute resolution under the Franchising Code and the Oilcode;

The impact of the Australian Consumer Law unfair contract provisions on new, renewed and terminated franchise agreements entered into since 12 November 2016 including whether changes to standard franchise agreements have resulted;

Whether the provisions of other mandatory industry codes (such as the Oilcode) contain advantages or disadvantages relevant to franchising relationships in comparison with terms of the Franchising Code;

The adequacy and operation of termination provisions in the Franchising Code and the Oilcode;

The imposition of restraints of trade on former franchisees following the termination of a franchise agreement;

Enforcement of breaches of the Franchising Code and the Oilcode and other applicable laws (such as the Competition and Consumer Act) by franchisors; and

Any related matter.

Senator John Williams (National, NSW) has led calls for the Inquiry, and it is understood the Inquiry has the support of the Small Business Minister Craig Laundy.

Although the Terms of Reference themselves are unremarkable, and indeed represent a toning down of media rhetoric that questioned the sustainability of franchising as a business model, the Inquiry is likely to shine a very bright spotlight on franchising. That of itself is no concern, as all previous inquiries into franchising have had a similar purpose and have concluded that the vast majority of franchise systems conduct themselves appropriately. The bigger concern is whether the Inquiry will consider the underlying root causes of any identified problems, and whether media coverage will be objective and balanced.

Announcing, and implicitly claiming credit for, the Inquiry, Fairfax Media claimed that “a series of investigations by Fairfax Media has exposed brutal business models and a power inbalance [sic] between franchisees and franchisors, with many small business owners being driven to financial ruin while franchisors make considerable profits.” Fairfax went on to suggest that “a string of major companies whose franchising models have come under fire over the past two years following investigations by Fairfax Media are expected to be called to give evidence”, naming 5 companies specifically.

This reporting alone arguably lacks fairness and objectivity, and probably sets the tone for future reporting on the Inquiry. Unfortunately, the line between colourful journalist rhetoric and informed contributions to policy development seems blurred in some parts of the media. It is arguably reasonable for media to report untested assertions by aggrieved franchisees, but industry policy needs to be formed on fact. Similarly, at a political level there may be some political or social benefits in establishing a “wailing wall” mechanism as part of the Inquiry. However, again, industry policy should be formed by an objective consideration of the root causes of any identified issues, as opposed to an emotional response to untested assertions.

Franchising is not a business itself, but a way of doing business. Brand owners, manufacturers and suppliers have various options in the distribution of their goods and services. The success of franchising in Australia has created opportunities for tens of thousands of small business owners. Some major brands have already signalled a move away from the franchise model, with the consequence that corporate stores or online distribution will replace local business ownership, and rural and regional Australia will be likely to see a contraction in access to certain goods or services and a reduction in employment opportunities.

A calm consideration of the matters identified by the Terms of Reference will yield improvements to the regulatory framework, improve behaviours and help restore confidence in the broader franchise sector. An intemperate policy response will threaten the viability of small business by making it less competitive, turning businesses away from the franchise model as a distribution mechanism and harming the very people that the Inquiry is designed to assist.

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